Last Updated on June 10, 2024 by CREW Editorial
If you are unable to make payments on your mortgage, for any reason, you are considered to be in arrears. The next stage, defaulting on a mortgage, can result in a power of sale or foreclosure. In Ontario, power of sale comprises the vast majority of legal actions taken.
According to Jonathan Alphonso, a mortgage agent with Mortgage Broker Store, “Changes in life circumstances can lead homeowners to this situation at any time, so it is important to know what options are available if this happens. Even a single missed or delayed payment can lead to legal actions from a lender.”
Defaulting
Defaulting on a mortgage occurs when a borrower fails to adhere to the terms and conditions outlined in the mortgage contract. This could include missing multiple payments, not maintaining required insurance, or neglecting property taxes. Defaulting can trigger serious consequences, such as the initiation of power of sale proceedings by the lender.
One of the most important mortgage agreement terms is making monthly payments on time. Sometimes, a homeowner may miss a monthly payment due to a specific, temporary situation, and the homeowner may be able to continue with these payments in future without issues. While occasionally, it may be possible to negotiate alternative arrangements with the lender, this failure to pay can result in the lender initiating a power of sale action.
Trends in Mortgage Arrears in Canada
Despite facing challenges like the COVID-19 pandemic, most Canadian borrowers avoid being in arrears, or failing to make mortgage payments. In Canada, as of February 2024, the percentage of those in arrears is 0.19%; in Ontario, this is 0.13%. For comparison, in 2014, the percentage of homeowners in arrears was 0.35%; this rate has gradually declined, with a few fluctuations. When payments are missed, it tends to be due to unexpected job losses or major life changes.
While this rate is still historically low, it is rising from lows of about 0.15% in 2022; it is also important to note that these numbers cover arrears for bank lenders only, as alternative lenders do not share this information. During recessions or periods of a weak economy, the numbers of people having difficulty paying their mortgages tend to increase.
What Is the Difference Between Power of Sale and Foreclosure?
When homeowners can’t keep up with their mortgage terms, it can lead to what is known as mortgage default. This covers various situations beyond the more commonly known ones of missing payments or not renewing insurance on time. If the property isn’t maintained properly or taxes go unpaid, that also counts as default.
In Ontario, the predominant method for addressing mortgage defaults is through power of sale. This legal process allows the lender to sell the property while the homeowner retains ownership. Typically, power of sale proceedings can conclude within a few months, but it comes at a significant cost to the borrower – as much as $30,000.
On the other hand, foreclosure involves the lender assuming ownership of the property, along with associated gains and liabilities. It involves lengthy court proceedings, unlike power of sale, and can be financially burdensome.
The key differences between the two lie in the ownership and processes. With power of sale, the borrower retains ownership, unlike during foreclosure, when the lender takes over ownership of the property. Foreclosure entails legal proceedings through the courts, while power of sale bypasses such formalities. Foreclosure typically is a longer process because of the court involvement and legal procedures, taking a year or longer, whereas power of sale typically is over in four to six months. However, the process lengths can vary.
Not all provinces allow power of sale, but Ontario does; power of sale is predominantly used in Ontario.
Why Do These Differences Matter to a Homeowner?
While power of sale leaves the ownership with the owner, and the process can be completed faster, it does come at a cost. If an owner misses a payment or a couple of payments because of a one-off situation, a power of sale can mean the loss of a home, against the wishes of the homeowner, despite an overall creditworthiness.
Power of Sale Process
Borrowers should be aware of the power of sale process, as this is the primary legal action taken against homeowners who have defaulted on a mortgage. In Ontario, a lender can start the power of sale process 15 days after a homeowner is in breach of a mortgage term.
The lender then sends a Notice of Sale, noting the mortgage default and the amount needed to stop proceedings. A redemption period of 35 days is provided to allow for a potential resolution. This may include clearing the entire balance plus covering legal fees. If this amount is not paid, the lender can proceed and issue a Statement of Claim to collect the debt owed and seek possession of the property. The borrower can submit a Statement of Defense to contest the legal action. If no Statement of Defence is filed, the lender can obtain a default judgment. Then, the lender must apply to the court for permission to issue a Writ of Possession. Next, an eviction notice is issued, establishing the timeframe to vacate and enforcement details. The property is then sold to repay debts and expenses. Any remaining funds are returned to the homeowner.
Preventing Power of Sale
If a homeowner is in financial distress, particularly if it is only a temporary situation, there are strategies to avoid power of sale. Maintaining open communication with the mortgage lenders is important, as the borrower may be able to negotiate loan modifications such as extending the loan term, reducing interest rates, or suspending payments temporarily through forbearance agreements. Refinancing is another avenue, allowing homeowners to secure more favourable terms or lower interest rates if their financial situation has improved since obtaining the mortgage. Seeking professional advice can provide valuable guidance on rights and potential courses of action. Additionally, leveraging home equity through solutions like home equity loans or lines of credit can offer relief by providing funds to cover mortgage expenses. These combined efforts often empower homeowners to navigate temporary financial hardships and avoid the dire consequences of power of sale.
Stopping a Power of Sale
It is important to know, however, that even if a power of sale has begun, there are options to stop it. Consulting and working with expert private lenders is generally required.
One option is securing a new primary mortgage, or first mortgage, to cover the accumulated fees and costs while renegotiating terms for a more manageable monthly payment going forward. By obtaining this new mortgage, the homeowner can stop the power of sale process and regain control over their financial situation.
Another option is to take out a second mortgage on the property. Depending on the equity built up and the property’s location, this could provide the necessary funds to cover outstanding arrears, fees, and ongoing mortgage payments. Again, a private lender is typically needed for these types of loans.
Second or new primary mortgages are considered high-risk loans because of the mortgage default; as a result, banks and more traditional lenders are unwilling to offer these. However, private lenders may negotiate such loans. A private lender in Ontario with expertise in these situations, who offers suitable options that meet these special needs, can make a significant difference in these cases.
A homeowner can also sell the property before the power of sale proceedings are initiated. In this way, the homeowner can avoid the hefty fees and potential profit loss associated with a forced sale under power of sale conditions, and retain greater control over the transaction. This can help minimize financial losses for a more favourable outcome. This requires a quick sale; a cash buyer may provide a solution.
Additional Issues Related to Power of Sale Actions
Homeowners using some private mortgage lenders may be more vulnerable to situations where a power of sale might arise.
Jonathan Alphonso comments, “We have seen several cases, where private mortgage lenders may include terms for only one year, but then charge a renewal fee, which can be very costly, creating financial strains for the homeowner. Some private mortgage lenders may have other predatory terms, and initiate a power of sale after having missed only a single payment.”
He adds, “There are routes that you can take, however, to avoid the negative impacts of these situations. We have successfully helped many homeowners facing these issues, so homeowners need to know that they don’t need to panic, and that there are solutions.”
In a power of sale scenario, lenders may demand the immediate repayment of the entire outstanding loan balance. If the mortgage is expired, the lender may skip the notice of sale and demand full repayment right away. This can catch borrowers off guard, especially if they believe they have more time to resolve the default. Halting the power of sale proceedings can prevent this, so borrowers have additional time to explore solutions.
Beyond losing the property, borrowers may still be liable for any shortfall between the sale proceeds and the outstanding loan balance, causing further financial strain and negatively impacting their creditworthiness.
Getting Help
Halting proceedings can provide immediate relief and time to address the default, although it does not eliminate any debt. However, this opportunity to explore alternative solutions can help preserve your equity in the property, and potentially help you retain ownership.
Having an expert on your side in these cases can help significantly, both before entering into such mortgages, or if you are facing a power of sale. These situations can be complex, so consulting with a professional is a significant advantage. The Mortgage Broker Store team has helped many homeowners across Canada facing power of sale actions and other related issues, acting on their behalf to stop a power of sale and negotiate reasonable terms, or enabling a less-rushed sale of the home, ensuring it receives the full value it is worth. They have expertise in identifying suitable solutions to help ease the immediate financial stresses faced by homeowners in these situations, and mitigating the negative impacts of a power of sale.
